Biotechnology Investment Incentive Tax Credit Update for Maryland Companies
August 10, 2021
Maryland’s Biotechnology Investment Incentive Tax Credit (BIITC), provides investors in Qualified Maryland Biotechnology Companies (QMBC) with a valuable, refundable tax credit and spurs investment in Maryland’s thriving biotechnology industry. The Department of Commerce will begin accepting applications on August 23, 2021, which has left many asking, do we qualify?
Determining your status as a QMBC or as a qualified investor can be complicated, and the multi-stage application process can be overwhelming. To help Maryland’s biotechnology companies and their investors understand if they qualify and successfully navigate the BIITC process, SC&H’s Angelo Poletis, Principal of our Tax services practice, recently facilitated a lunch-and-learn in partnership with Johns Hopkins Fast Forward. Watch now or read the transcription below to learn more about eligibility criteria, benefits, application timeline and deadlines, and other invaluable tax planning strategies.
For a downloadable pdf version of the presentation deck, click here.
To view the entire recorded presentation, which includes information about the ERC, click here (and use passcode: P6%H%u+E)
Video Transcription
Sarah Sedlak: We’re going to cover the BIITC tax credit. This is a complicated one, but incredibly valuable. We’ll talk you through the ins and outs of that. The employee retention tax credit, also incredibly valuable, Leanna has plenty of expertise over the last year or so, PPP Round 2, and then some additional items that are relevant and timely right now that can help you with cash flow or investor conversations. I’m going to turn it over to Angelo and Leanna now.
Angelo Poletis: Hi, my name is Angelo Poletis, as Sarah mentioned we’ve been working with Fast Forward and a couple of the other incubators as well. We gravitate toward Fast Forward. It’s a much more robust and active group than some of the others. We’re very grateful for the relationships that we’ve generated here. Working with Mark and Rick has been a pleasure. There is a huge interest with regard to this bio investment credit, and the state has taken its responsibility very seriously as well. The legislature created a bureaucracy that’s not easy to get through. So what we found is that within FastForward and within the legislature, there are folks that know this stuff in and out, the nuances, and what to pay attention to and what not to pay attention to. We think that this is super valuable, especially to investors, where you can come in and return some of their investment right off the bat, they jump through the hoops and dot the Is and cross the Ts. As far as me individually, I’m a tax partner. We look at the tax returns and we help with tax compliance. We also help with setting up the companies and looking for things like Section 1202 qualified small business stocks and things of that nature. Leanna, I’ll turn it over to you and let you introduce yourself as well before we get started.
Leanna Steele: Thanks, Angelo, Sarah, and Mark for hosting this. I am Leanna Steele. I’m a Manager in the SC&H Accounting Solutions department, where we do all manner of outsourced accounting and consulting for a pretty wide range of client and business types. We do have a special place in our hearts for the startups from Fastforward. I personally have been able to work with a couple of dozen startups that have come through the Johns Hopkins FastForward program through the last four or five years. It’s always refreshing to work with startups because there’s so much innovation and enthusiasm and that great energy. I really enjoyed it. We do all kinds of different consulting with supporting clients on these different covid features, grant reporting, and compliance around all those different features, so thanks so much for having us today.
What is the Biotech Investment Incentive Tax Credit?
Angelo Poletis: The Biotech Investment Incentive Tax Credit is different than many of the credits that we’re familiar with. If you have an individual tax return or a federal tax return where you’re trying to get research and development credits, which is what many times the biotech companies do. If you’re working with the research and development credit at the federal level, there’s no limit to the credit. If you qualify for it, it reduces your income taxes and then you move forward. If you don’t have income taxes, the federal allows for some of the payroll taxes to be offset by research and development credit, but there’s no limit to how much you have. If you qualify for it, you get it. With the Biotech Investment Incentive Credit and with many of the state credits, there is a limit to what is funded, The way this works is that the state sets aside on an annual basis a dollar amount that will allow for a pot. In 2021, we have a $12 million pot, and people will apply for a piece of this $12 million, once we run out of the $12 million, that’s the end of the game until next year when it gets refunded again by the state. It’s a little bit different and we wanted to focus on the first-come-first-serve issue. It drives a lot of what folks do.
There have been some years when this credit was undersubscribed and some of the funds went back to the coffers of the state. That hasn’t happened for the last bunch of years for a few reasons. One, because this is gaining in popularity and it’s a really, really nice credit to have. Just recognize that it is funded to a limited amount, in this case in 2021 for $12 million. It’s a fairly sizable amount when you think about the limitations and the number of investors that can get it. It’s not like you have to run to the front of the line, but at the same time, you don’t want to wait and dally too long. Our suggestion is that you follow the timelines and we’re going to go over what those timelines are. They will start in August and then sort of ramp up for September.
The amount of the credit is 33% of the investment, so there’s a couple of key things here. One, the company doesn’t get the credit. The investor does. And so when you think about these things, if you’re getting research and development credit or you’re getting a grant of some kind, typically the company gets those funds. In this case, that’s not the way it works. The investor gets the credit and he or she has to file a Maryland return in order to get the funds. That’s a key point as well. The amount of the credit depends on the amount invested, so you have to put in at least $25,000 of an investment and if everything qualifies, if the company qualifies and the investor qualifies, you can get 33% of that back. So you’re saying, well shoot, Angelo, I don’t live in Maryland. In many cases, the investor can be from a foreign country and you say, well, if I’m going to put $100,000 in the company, how do I get that money back? The credit is actually in the form of a tax return filing. If you don’t have a connection to Maryland or you don’t otherwise file a Maryland income tax return, you would file a Maryland income tax return. The tax liability would be zero and then following the compliance regulations, you would get your refund back from the Comptroller of Maryland.
The administrator to the credit is actually the Department of Commerce and the person who writes you the check is the Comptroller of Maryland. You’re praying to do for two different gods as to how you get your funds. One, you talk to the administrators and you qualify and you get a certificate. That certificate you then present to the Comptroller of Maryland with a tax return and they will write you a check. The check is written to the investor and the investor has to qualify and provide the documentation. The amount of the credit is enhanced if we meet certain criteria, and that’s the criteria that are on this slide. There are three or four counties in Maryland that are economically advantaged with regard to this credit, and the amount of the credit that goes to the investor can actually be increased to 50%, in some cases 75%. If you’re in something called a RISE zone, a regional institutional structure enterprise zone, certain institutions have benefited from this as well. Johns Hopkins is not one of them.
Mark VanderZyl: The Baltimore location is an opportunity zone, 1812 Ashland is, but Remmington is not.
What is a Qualified Maryland Biotechnology Company?
Angelo Poletis: OK, thank you, Mark. This particular slide is key for a couple of different reasons.
- The investor is the one who gets the credit
- The credit is limited
- There is a limitation on the upper end of the credit so that any particular investor can’t get above $250,000.
The way this thing works is that the company first has to meet qualifications to be a Qualified Maryland Biotech Company (QMBC) and you’ll see this several times throughout. When we refer to QMBC, we’re talking about the company itself. We meet certain criteria. We provide the Department of Commerce information that can be hefty from time to time, but we meet the research and development items that are listed here for innovation, proprietary technology that is biotech-related.
In order to get the credit, we have to meet the criteria that have been put in the legislation. These criteria are in the law. It’s actually also in regulations and the Department of Commerce does a great job at giving you links to the resources. We’ll give you links to the law itself and also to the regulations that the state has put into place. Among the regulations as to what the company has to do to qualify to be a qualified biotech company, QMBC, we have to have headquarters and Maryland, the base of operations in Maryland. That’s a key. Obviously, the incentive here is that the state wants you to be here and those two items are particularly important. There is the third bullet point down. It says one non-executive employee performing the research. So that’s a big key item as well. A couple of important things to note is that person has to be an employee. We cannot hire a company to do our research for us and meet these criteria. They have to be an employee. We have to pay him or her wages. They can’t be 1099s. We can’t hire an S corporation to do that work, even though that person may be the same person who actually does the work. There is minimum funding that is required in the capital and that $100,000 is not eligible for the credits. The first $100,000 in is required to meet the QMBC, but that person or structure cannot benefit from the credit for the first $100,000. The other ones are somewhat self-explanatory, the certification by the secretary is a QMBC, is incumbent upon filing the paperwork and we’re going to come across some of that in one of the slides, I believe.
The “Cure” Period
Angelo Poletis: OK, let’s move forward. This is a cool slide here, and it’s in response to some of the prior year’s issues that had come up. Sometimes it was a guessing game as to whether the company qualified or not there. The Department of Commerce and specifically the people that administered this particular credit were responsive to the companies that said, hey, we tried, we didn’t make it. You pointed out that we needed to fix something. So the Department of Commerce, in its wisdom and listened to the people that were affected by this and now allows for a curative period. For example, if we file and don’t have anybody employed, as we mentioned on the prior slide, within 60 days, you could hire somebody. You would bring in the money, then use that money to hire somebody and cure that particular item if we failed that criteria. This is the state actually listening to its constituents and making this more available to more companies. Please know that there’s a curative period out there that if we do fail one of the items, that we can fix it within a requisite period of time in the 60 days, we think is more than reasonable and we’re grateful that this is here.
Sarah Sedlak: Angelo, just to point out real quick that oftentimes one of those criteria is dependent on actually the investor funds coming in. That’s the key reason this is built in there. Right? You need the investor money to hire the employee. Chicken or egg situation. This solves that.
How to Qualify as an Investor
Angelo Poletis: Yes, perfect, thank you. So now let’s focus on the investor. We are qualified as a company. Now, the investor also has to qualify and he or she has to provide certain information as well. The fourth bullet point lists out the counties where there’s an enhanced amount of credit that’s available. I don’t believe that Hopkins has any places there, so we typically don’t see too many particular qualified companies that come out of there, but this is an effort within the state and the state legislature to spur investment in biotech companies in those four particular Maryland counties. As we mentioned earlier, the $25,000 is the floor, and the investor can obviously put in more money than that. The more money they put in at 1/3 of the credit, the more credit they can get back. One of the curious things that have happened is that the state doesn’t care where the money is coming from. It’s a way to draw funds from other countries or other states into Maryland so that these Maryland headquarters companies can benefit from investments from other places.
One of the criteria there has historically been that if we have a tax haven country, in other words, there isn’t any taxation or tax reporting that investors that are from those particular jurisdictions are not eligible for the credit. So, one of the things that an investor will testify and will state in his, her, or their investment information is that it files a tax return. The state can come back and ask for a copy of that tax return, although I’m not sure that we’ve ever seen that. But if you say, I’m from the Cayman Islands, we don’t have any taxes and it is a tax haven country. Then that that investor is not qualified. But if you’re in Japan or if you’re in Singapore or if you’re in the U.K., that investor qualifies as well. One of the things that we’ve seen that has been a bit of a problem is that the state of Maryland, the person who pays us, will typically ask for a Social Security number or a federal US ID number. The filing of those forms with the Comptroller’s Office can sometimes be a bit of a challenge. We’ve been able to contact the Comptroller. They now are much more aware of this sort of glitch, if you will, and they ask for the forms to be electronically filed if you don’t have a federal ID or a Social Security number. Sometimes it’s difficult to file those forms electronically. The state has gone out of its way to make it accommodating for those particular situations. In the past, that’s been a problem. We think it’s still going to be a problem, but maybe less of a problem. So foreign investors are a target for this particular credit.
Precertification
Going back to the company itself, there is a Form B that the qualifying company has to submit. On that particular form is a notorious question 11 where it asked for a series of organizational documents listing business plan, documentation of the experimentation activities, and things of that nature. The state has been very, very good about trying to be as explicit and as thorough as it can so that the submitting company can get this the first time through. There are situations where the state comes back and ask for clarifications. Among the things that we, SC&H, have been particularly impressed with are the technical skills of the people that are reading the information that’s submitted. They have beefed up their administrators quite a bit. It used to be basically one guy doing the whole thing with administrative help, but he has graduated and there are a group of folks that are super responsive at this point in time. If there is something that might raise a flag, they typically will reach out to the applicant and get that cleared up. Now going back to the investor, I’m sorry for flipping back and forth, but it is important to make the distinction as to who’s submitting information and why they’re submitting it. So investors would be submitting these A Forms. The company will be submitting the B Forms and then within the A Forms, the investors depending on the type of entity would file on A1, A2, or A3, again, this is explained on the Department of Commerce website, and we frequently go back to that Department of Commerce website for clarifications and FAQs.
The Timeline of the BIITC
Sarah Sedlak: Angelo, real quick, we’re going to get into the timeline on this next, but just to clarify for everyone, because this is completely nonsensical, Form B, which is the form the biotech company has to fill out, comes first. Form A, which is the form for the investor comes second. So just more bureaucracy that makes no sense. Just keep that in mind, the order of these forms.
Angelo Poletis: Going back a few years ago and again before we came kicking and screaming into the digital age, there were actually people that would stand in line in front of the office in order to be among the first people there. First things first this August 23rd is a deadline for the company. It’s important to get us company qualified so that investors can get into the queue. The investors would then submit their applications starting on September 7th, again because it is a first-come, first-serve, we would encourage people to apply as early as they can.
Sarah Sedlak: Angelo, take them through the process for the investors because the Form B, submitting that is pretty straightforward. But the timeline for the investors is sort of two different things.
Angelo Poletis: Great, thanks. So the investor and its Form A should go into the company. The company would then get a receipt and a username and a reference number, that username and reference number are super important because they will be used later on by the investor to get into the queue. On the next slide, we talk about the timing for the investment and the notification to the state that the investment has been made. Again, from September 7th to September 27th, the investor gets its username and reference code and on September 28th you submit or later, the investor would submit and file within 30 days from the date when commerce issues the credit certificate, you make the investment. Then the investor notifies the state that the investment has been made within 10 days. Submitting proof back and forth is important but having that certificate is what gets you the credit. You have to jump through the hoops that are listed here. They’re also listed on the website as well.
Sarah Sedlak: This is important because if your investors are going to go for this and they aren’t familiar with it, often require a little bit of coaching from you on how to do this. So, being able to tell them this is not a guaranteed thing, you have to be first come first served on the website. This is all pretty valuable and important information so you should be upfront with the way this works with your investors and potential investors. Here’s the link to the Commerce Page. Today, we have questions about the BIITC tax credit. Angelo, the only other thing that we had on this was convertible debt, maybe just touch on that real quick, because that is something that a lot of these guys have.
Convertible Debt
Angelo Poletis: Yes ma’am, and it’s a feature that we absolutely love because there was always sort of jockeying back and forth. The company wants the money and the investor wants to put the money in, but we want to wait until we get the certification and the September 7th and September 28th due date deadlines are hitting. So, what this allows is for the company to initially receive debt from the future investor. The investor comes in as a creditor. If that loan is within one year of the investment, then the conversion can take place, the investor gets the credit, the credit gets converted into equity, and everybody wins. The company will have had use of the money in the meantime, as we’re waiting for the certification and the deadlines and all of those kinds of things to meet. This is an incredibly flexible tool, one that we like a lot. If if the debt is more than a year outstanding, then it would not qualify it upon conversion of the BIITC.
Let’s give a quick example. So on June 1st, I get somebody who says I’m going to invest $100,000 dollars in your company, I really want the $33,000 dollars refunded back, so that net-net, I’m only investing in you for $67,000 dollars. Here’s your money, I know you need it. Let me give it to you in the form of convertible debt. So the investor puts in debt and is now a creditor. We jump through the hoops and make our company QMBC qualified. The investor starting on September 28th gets certification. Within 30 days of that certification, we convert the debt to equity and everybody’s happy at that point in time. There are 10 days to get notified but the investor notifies the state and we’ve got a good transaction. Upon the filing of the return, the investor would get his or her $33,000 dollars from the comptroller. This convertible debt is often used and as long as it’s not within a year or more than a year, then we’re good to go with this.
Mark VanderZyl: Can I ask a clarification question about the limit? Is it limit per startup, let’s say $250,000 versus limit per investor? If you’re a startup, you only have up to $250,000 of your total investors receive this credit in a year.
Angelo Poletis: The investor limitation is $250,000.
Mark VanderZyl: Let’s say I invested in two startups as an investor. Could I max that out for both startups?
Angelo Poletis: Yes sir.
Mark VanderZyl: In theory, but if a startup has two investors, both investors couldn’t max it out for the same startup company.
Angelo Poletis: They actually could. So the startup company for the company itself, there’s a seven million dollar limitation. So we can go up to seven million and the investor per qualified company can get up to $250,000.
Mark VanderZyl: That is super valuable, thank you.
Angelo Poletis: That’s a good example. The type of investment is not limited. You can have an LLC, typically LLCs are treated as partnerships but can make elections to be an S corporation or C corporation. The type of equity that you own would not be a problem for this credit.
